Itaú BBA - MEXICO – February CPI decelerated, with core inflation falling slowly

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MEXICO – February CPI decelerated, with core inflation falling slowly

March 7, 2019

Lower non-core food prices exerted downward pressure

CPI was dragged by non-core food items. Inflation fell 0.03% month-over-month in February (compared to the 5yr median of 0.38%), below our forecast of 0.04% and market expectations of -0.02% (as per Bloomberg). February’s figure was dragged mainly by a fall in non-core food prices, which fell 4.28% month-over-month (from -1.89% a year ago), while energy prices grew 0.83% (from 1.57% a year ago). In contrast, core inflation decelerated slightly, posting a rate of 0.43% month-over-month in February (from 0.49% a year ago). Looking at the breakdown, core services and tradables grew 0.49% (from 0.54% a year ago) and 0.36% (from 0.45% a year ago), respectively.   

On an annual basis, headline inflation fell, helped mainly by non-core food items, while core inflation slowed down slightly. Headline inflation decelerated to 3.94% year-over-year in February (from 4.37% in January). Looking at the breakdown, core inflation decreased to 3.54% in February (from 3.60% in January), with core goods decelerating to 3.61% (from 3.66%), while core services decelerating to 3.43% (from 3.51%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services, and airfares) accelerated mildly to 3.64% year-over-year (from 3.62% in January). In turn, non-core inflation decelerated to 5.25% year-over-year in February (from 6.81% in January), with non-core food inflation decelerating the most, to 4.80% (from 7.41%), while energy prices grew 6.57% (from 7.36%). Within energy prices, regular gasoline prices decelerated at a slower pace than previous months (10.64% year-over-year, from 13.45% and 19.34% in January and February, respectively), associated to an increase in gasoline prices during the second half of February.

At the margin, headline inflation slowed down at a faster pace than core inflation. Using seasonally adjusted three-month annualized figures, headline inflation decelerated sharply to 0.40% rate in February (from 2.73% in January), while core index decelerated at a slower pace (3.04%, from 3.69% in January).

We revised our yearend forecast for 2019 to 3.6%, due to recent downside surprises. Importantly, core inflation, which Banxico’s board is closely monitoring, is falling (although at a slower pace than headline inflation).  However, remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and over domestic policy direction continue to be relevant upside risks for inflation.

Julio Ruiz

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